The Chiang-Mai Initiative
Since the severe regional crisis of 1997-98, Asian countries have, with some exceptions, chosen to maintain fairly open capital accounts but have recognised that they need to buttress their own reserve holdings considerably with external liquidity arrangements. Against this background, and recognising that financial stability has the characteristics of a regional public good, it is understandable that Asian countries have been eager to promote regional monetary cooperation. The Chiang-Mai Initiative (CMI) has taken centrestage in this regard. As far back as the 8th APTs finance ministers meeting in Istanbul in
May 2005, there was an agreement to re-evaluate the process, including the possibility of regionalising the arrangements. As part of this, there was an agreement to explore the feasibility of developing a collective mechanism to activate the swaps. There was also recognition of the need to expand the scope and extent of regional dialogue and surveillance and link these more closely and effectively to the CMI.
Despite this, though, there was not much forward movement on these issues until recently. This situation changed when, in the latest meeting of APT (Asia plus Three) finance ministers in Phuket, Thailand, in April 2009, APT countries finally reached an agreement to transform existing bilateral arrangements into a regional foreign reserve pool of $120 billion to address short-term liquidity difficulties in the region and to supplement the existing international financial arrangements. The CMI multilateralisation (CMIM) is expected to be launched by end of 2009.
The Plus Three countries of China, Japan and South Korea will contribute 80%, with the 10 Asean countries sharing the remaining 20%. Of the 80%, Japan will contribute $38.4 billion to the pool (it has also extended $60 billion of yen-denominated swap facilities separately) as will China (in conjunction with Hong Kong), while Korea will contribute $19.2 billion. Within Asean, contributions of member economies will be primarily by Indonesia, Malaysia, Thailand and Singapore, with each contributing $4.76 billion, and the Philippines $3.68 billion.
Other details remain unclear, however, though it appears that the same conditions as the CMI (i.e. 20% unrestricted borrowing and 80% balance only with IMF conditionality) remain in place. What is important is that the regional economies have agreed to create a stronger regional surveillance system in conjunction with the ADB and the Asean Secretariat to provide oversight of the fund and help with its operation.
Regional reserve pooling
Presumably, if and when this surveillance system is effectively established, the 20% of reserve that can be tapped without IMF conditionality will be increased, though one will have to wait and see if this will happen.
Given that the region holds well over $3,500 billion of reserves, the proposed reserve fund is modest as of now, but has the potential for significant expansion over time, especially if countries like India are included as well. While the membership issues need to be resolved, the CMIM has provided much-needed impetus to monetary regionalism in Asia and is an important step in creating pools of liquidity. A regional reserve pool could involve three tiers of liquidity. The first tier would be owned reserves that offer the highest degree of liquidity and have zero conditionality, but this is costly. The second tier would be sub-divided into a countrys own reserves placed with a regional pool and other members reserves with the pool (CMIM). The third tier would be conventional IMF lending via its various facilities. With a structure of this sort, the degree of liquidity could be inversely related to the degree of conditionality. Such a regional reserve or insurance pool would help supplement the ongoing restructured/new IMF lending facilities to fortify the regional economies against future financial crises.
However, no effective deepening of regional monetary integration will happen until there is a considerable strengthening of the regional surveillance mechanism with a well worked out surveillance and policy conditionality. The announcement of the strengthening of surveillance alongside the creation of the CMIM is, therefore, an important step. Note though that surveillance by itself would be insufficient if it lacked teeth and if it did not include remedial actions by regional members maintaining unsustainable policies. There is also the other equally hard issue of what such a regional liquidity arrangement would imply for exchange rate coordination. Countries with relatively fixed exchange rates will require larger reserves to manage their currencies and/or pursue more disciplined domestic economic policies, while countries running more flexible regimes could potentially cause or be faced with competitiveness pressures in the near-term vis--vis the other countries if their currencies appreciate or depreciate sharply. Neither surveillance nor exchange rate coordination is an issue that has seen much progress in Asia to date, leaving one somewhat sceptical about how viable or effective the CMIM or any sort of regional liquidity arrangement might be in going forward.
Beyond liquidity arrangements
It is fair to say that one needs to look beyond the CMIM to consider more intensive forms of regional cooperation to boost regional demand and development. The reason is that, apart from the fact that the ongoing crisis has illustrated clearly the risks of depending too heavily on external demand, emerging Asia needs to pay particular attention to boosting regional demand as there are serious questions about whether export-led growth has reached its limit, with medium-term trend growth in the US and the EU likely to be slower than the leverage-induced pre-2007 growth. While intra-regional trade in Asia has appreciated markedly (about 50% of the total trade), the bulk of the trade is in intermediate products with the final demand still being in/or from the US and Europe. In this regard, the region should redouble its efforts to pursue various free trade agreements, particularly with China and India. Schemes to assist cross-border infrastructural development, the development of regional tourism, and other such initiatives should all be pursued with renewed vigour. This, in turn, will necessitate significant boosts in consumption and investment, which will almost inevitably mean a decline in regional current account surpluses and possibly a recycling of a greater share of external surpluses to the rest of the region. There are clear synergies to be had from regional cooperation to stimulate demand and advance development in the region.
In the absence of effective social-safety nets and in view of the large number of impoverished that still exist in developing Asia, pursuit of stable economic growth has to be given as much attention as the pace of growth.
The author is associate professor, School of Public Policy, George Mason University, Virginia, US and visiting senior fellow, Institute of Southeast Asian Studies (ISEAS), Singapore